The Myth of Under-provision of Science by the Free Market

One of the recurring myths propagated by today’s mainstream economists is that scientific research requires government funding in order to give society the maximum contribution possible. They start from the correct argument that scientific research is a fundamental link in the chain leading to development, but arrive at the incorrect conclusion that due to its significance it necessitates government funding. This is due to the incorrect assumption that not enough research will be provided by the free market. However, this conclusion is based on faulty economic theory. The two biggest mistakes economists make when it comes to scientific research is that they assume that it is a so-called ‘public good’ and base their conclusions and analysis on a theory that neglects the role of the entrepreneur in this field. This paper aims to show that both of these arguments are wrong: not only is scientific research not a public good but also the entrepreneur, guided by profit and loss, is the most effective decision maker when it comes to the crucial questions of how much research is needed and how it should be provided. The fact that the entrepreneur works as a coordinator, guiding resources in their correct uses and making decisions about how scientific research should be carried out, makes the free market a much more efficient and effective provider of scientific research.

Economists widely hold that science is both non-excludable and non-rivalrous thus necessitating government funding. However, Terence Kealey, a scientist specializing in Clinical Biochemistry argues that in practice this is not so. This is because the cost of interpreting the ideas provided by science is not the same as ideas in other fields. Being able to use scientific research is not the same as copying a cooking recipe for instance (although some may argue even that is not perfectly replicable, as it depends on the skill of the cook). People are excluded from the benefits of theoretical science because of the fact that they are not all equipped with the necessary scientific background to understand it and be in a position to use it meaningfully.[1] I would argue this is analogous to wireless internet services which technically are non-excludable but can be made so with the use of a password. In the case of science this metaphorical password is the necessary training and academic achievement to become part of this scientific community. Moreover, in order to make important discoveries and get the benefit of access to other scientists’ research, scientists have to be published in order to build a reputation. Therefore, although ideas in science are not always exchanged for money, they are exchanged for other ideas. These ideas need to be provided freely by the scientist in order to increase his likelihood of gaining access to other scientist’s ideas that could further his work, thereby creating a pool of knowledge. Therefore, since people have had to incur a cost in order to be able to access this knowledge pool, Kealey defines science as an ‘invisible college good.’[2] Under this system scientific knowledge is used and distributed freely among scientists. Most advocates of patents say that this is problematic as scientists may have their ideas ‘scooped’ by others after publication and may not be able to reap the full profits from it. However, these people ignore that the first person to publish on a topic is the person to gain the academic credentials of this achievement. Also, by being the first person to make the discovery he gets to be the first person to profit from this discovery as it takes time for someone who scooped the idea to get to a point where he can produce something useful from it. However, even if we excluded this first mover advantage and assumed that replication of this person’s discovery was instant upon publication, he still benefits from this system. This is because although he incurs the risk of having his research scooped by someone else, he is more likely to in turn scoop someone else’s research as this free distribution system of science gives the scientist access to a greater pool of knowledge resources. This means that the speed by which scientists are able to adopt methods or ideas produced by other scientists and improve them in order to make greater profits in the area of applied research or improve their academic record in the area of theoretical research will be increased. After all, “technological progress is a gradual process, a chain of successive steps performed by long lines of men each of whom adds something to the accomplishments of his predecessors.”[3] Thus, we see that government funding is not necessary for science, as scientists have large benefits in terms of prestige and increased employment opportunities by publishing. Also there is no need for government protection of scientific discovery as the greater pool of knowledge emerging benefits all scientists alike and speeds up the implementation and development of new ideas.

Another main argument used as to why scientific research needs to be government funded is that in order to be conducted efficiently, large teams are required which are too expensive for individual firms to employ. This is the reason why they argue such teams will not emerge under a free market for science. However, the private sector will not do away with large team based projects, instead what the entrepreneur will do under a system of privately funded science will be to “right-size” his team. Since having a team of an unnecessarily large size will come at high costs to the entrepreneur there will be an in-built disincentive to let team size grow beyond the point to which the cost of the extra scientist outweighs his potential contribution. This disincentive does not exist when a team is being financed by government funds especially since a larger team can secure larger funds with greater ease. The existence of government funds creates a moral hazard problem as the cost of payment and management of a team that is too large is not borne privately. As Terence Kealey argues, “special interests only struggle for government funding if they suspect that the tax load will fall on others.”[4] Under a system of privately funded science, firms will hire enough scientists to ensure the project bears fruit but not so many so that the project ends up costing more money than it can earn. Thus profit and loss will guide the entrepreneur to the optimum team size. Most of the advocates of large teams point to the creation of the internet which was a large government funded project and argue that this could not have been created by the private sector. However this is a purely counterfactual assumption. The internet was an unintended consequence of government military spending and its present contribution to society had nothing to do with the government’s initial motives. It was the market that converted it into a good that had the ability to benefit society. Crediting the government for the invention of the internet is like crediting the Pharaohs for the modern Egyptian tourist industry. The fact that the pyramids they built enabled the private sector to detect a market opportunity in modern times does not in any way mean they should be given credit for it.[5] Moreover, in his paper Science, Technology and Government, Rothbard references a study by Jewkes et al that took 61 of the most important inventions of the first half of the twentieth century and found that over half of those were achieved by individual scientists at their own expense.[6] Most of the remaining inventions were achieved either by small firms or small teams working as part of larger firms. Thus he successfully debunks the myth that science is necessarily a project requiring a large team. In fact having large teams tends to cause large problems and has high administrative costs as it requires a large amount of coordination among its members. Large teams require complicated management structures, but this will inevitably mean that resolution of bureaucratic problems and coordination, as opposed to research will have to become the team’s primary focus. Since these coordination problems will not exist in smaller teams managed privately and funded privately, more results will be produced at a lower cost.

Moreover, any project that is led by a committee of people will stifle truly original ideas, which will often be dismissed as impossible. This is because the achievement of the innovator lies in the fact that “he accomplishes what other people believe to be unthinkable and unfeasible.”[7] Thus research reviewed by government boards is bound to frequently exclude the most original ideas. Even if these bodies were fully run by scientists and experts as a lot of people who advocate the government funding of science argue today, these bodies will still be characterized by a knowledge deficiency. This is because scientific knowledge is very specific and each individual invention requires a large amount of specialization in the field. Even taking a scientific discipline as established and widely studied as physics, a department of scientists focusing entirely on this subject will have to have a large number of specialists.[8] Even assuming that the department was able to employ specialists in astrophysics, nuclear physics, molecular physics, relativity, biophysics, electronics and all the sub disciplines of physics, their level of specialization would still not be enough. This is because even within those disciplines there are yet still narrower areas of focus that these scientists need to pursue. Therefore it is essential that science is managed on a more micro-scale as small teams of scientists or individuals can focus on the fields of knowledge they know best and it is this specialized knowledge that will render them able to understand which lines of scientific inquiry are worth pursuing and which are not. Thus this planning, especially when it is done on a very large scale inhibits, rather than encourages progress by the frequent adoption of bad projects and rejection of good ones because they fail to appreciate their originality and potential. If, however, individuals are allowed to pursue these ideas with their own resources free from government dictation exercising their entrepreneurial judgment, a system is created whereby the scientists particularly receptive to good ideas are rewarded by profits and those who fail to recognize good ideas are rooted out of the system by suffering losses. This profit and loss system is absent in government directed research, meaning that the government is not punished for its failures and inefficiencies and thus may be over-allocating money to bad projects. A perfect example of this is the case of the Ministry for International Trade and Industry (MITI) in Japan that has not only poured vast funds into wasteful projects but has also been strongly opposed to the developments of cars, electronics and cameras which are precisely the areas in which Japan has proven to be the most efficient. Moreover, just before the market for the small personal computer opened MITI invested in a giant project for the construction of 5th generation supercomputers that generated £400 million in losses by 1992 showing the severe consequences of their lack of entrepreneurial foresight on the taxpayer.[9] Also, having the best scientists in a sector pining for government jobs as opposed to doing research is inherently counter-productive as it causes a brain drain out of research and into bureaucracy. Finally, the need to request government grants for research will bring an end to serendipitous discovery and the hobby scientist which have been credited with discoveries such as the synthesis of water from its elements, evolution, and the construction of the Great Reflecting telescope.[10]

The issue of working conditions for scientists is extremely important, as scientific research is a field that requires immense amounts of focus. An unpleasant working environment or one not well suited to the scientist’s needs and plagued by bureaucracy will render him less productive which, especially in this sector, may mean that in the conduct of an experiment he may fail to make an observation that could lead to a large scientific discovery. This means that any government-directed and thereby non-individualized working environment will cause impediments to scientific research. However, if government stopped funding science and trying to create a formula for successful scientific research, what would emerge in the free market would be a variety of firms of different sizes conducting research in the manner that is best suited to the nature of the problem thus offering scientists working conditions tailored to the nature of the work they are doing. On the other hand, it is in the nature of any form of government funding to create barriers to entry for new smaller firms. This means that the firms that will remain in the market will be the few large firms able to obtain government grants. It is this absence of diversity in working environments that renders a lot of scientists unproductive as they are unable to work under the current system and have no other options. The existence of government conducted research will create a large barrier to entry for small scale untrained researchers. The fact that the only way to obtain funds and be able to assemble a team in order to conduct experiments will be exclusively through the government, will exacerbate the shortage and discourage people even more from becoming scientists. If the sole (or primary) employer is the government, this will lead to an increased difficulty to obtain a job as a scientist. This is because the government has to set a budget that is not flexible enough to change with market conditions. As a result instead of quality rationing, which will be the method of the free market, they will have to engage in quantity rationing. The high likelihood of unemployment coupled with the inevitably low government wages will cause fewer people to want to become scientists. People who are only interested in specific fields that the government underfunds will have a disincentive to put their own funds in their projects and compete with the government funded companies. This will mean that smaller scale projects enabled by the free entry into the sector are less likely to occur. These innovators will instead be pushed to overcrowded mainstream lines of research that receive large government grants instead. Another issue related to working conditions is the issue of the type of competition emerging between scientists under a government funded system. Under laissez-faire the expenditure on science is determined by the marketability and projected significance of a project. Under a government funded system where there is a limited budget, a government may be offered 100 great projects and only be able to fund 50. Thus the emerging type of competition is not competition to create ideas but essentially competition to sabotage those who potentially have better ideas than you. This creates an environment in which scientists do not cooperate and become increasingly preoccupied with secrecy instead of the promotion of knowledge as their success necessitates another scientist’s failure.

Furthermore, government research frequently gets caught up in existing research initiatives and tries to find applications for them even if these applications are not of any great importance. In a research system where decision making is done privately and risk is borne privately, entrepreneurs will ignore the importance of current scientific developments if their foresight indicates that this knowledge cannot be used any further, and will not divert resources away from other more urgently needed innovations. An example of the government making this fallacy lies in the exorbitant amount of funds governments have placed on space exploration. Although space exploration is an area of great intellectual interest, it has few if any applications to most peoples’ everyday life. As a result, even though people may be interested in space exploration, given the exorbitant costs the majority of people would not be willing to foot the bill out of sheer intellectual curiosity. This is because space exploration at this point in time has no track record of being able to make any tangible difference to the average person’s daily life. The government system, however, is rarely bothered with the public’s willingness to pay because when it comes to the funding of science it is a system that is “obsessed with supply, and … ignores[s] actual demand.”[11] That said, it is entirely possible that under a private system, wealthy entrepreneurs such as Richard Branson who have demonstrated a high intellectual interest in space travel, may fund it out of personal interest. There is, however, no justification for coercing every citizen of a state to pay for research and projects he has no interest in and will never use. Funding for space exploration started as a result of a western panic when the USSR were able to launch Sputnik, creating fears that they could destroy America from space. Given the fact that the project has had no further applications, the private sector would have aborted or downscaled this project and saved the public billions of dollars.

Overall, we have seen the significance of the profit and loss mechanism in allocating funding for science projects and deciding on a micro scale how these projects should be managed. The elimination of this profit and loss mechanism is bound to lead to inefficiency as government bodies will not be able to use it as a guide to determine exactly which research projects can bear the most fruit. Finally, we have seen how the public funding of science tends to distort its results because “science is nothing if it is not truth, and truth is hard to reconcile with politics.”[12]

[1] This lack of knowledge does not, however, exclude people from benefiting from the commercial products of this science.

[2] He explains this concept further in his speech at the 2010 Property and Freedom Society conference in Bodrum, Turkey.

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17 Comments

This is intriguing, with a premise I’ve long believed and for which I’ve sought support in personal discussions. I look forward to going through its arguments more intensely … once I reformat this, for my own use, with some paragraph breaks.

The Cobden Centre needs to learn the virtue of using paragraphs. (As do most places that print or Webify academics’ discussions.)

Breaking up those huge blocks of text is an editor’s job, and far from an arduous one. I’d contend that authors ought to expect that this will be done – or, better yet, do it themselves first.

If a piece can’t be easily read, with stops for the eyes and conceptual faculty to take some respite, it can’t get nearly as much of an audience.

I would add, having read this more intensely, that two other elements would help, which seem to be omitted far more in British than in U.S. sources: commas (including serial ones before “and”), and hyphens for compound adjectives (“government-funded”).

Again, adding these ought to be in the purview of editors, if authors will not do so. It may be coming from this reader’s more journalistic preferences, but such pauses or stops for the reader’s benefit should not be dismissed out of hand.

My apologies for riding this stylistic hobbyhorse. I entirely endorse the author’s viewpoints!

It is interesting you should mention this because after seeing the article in print I thought myself I should have made the paragraphing a bit clearer. Thank you for the feedback though and your nice comments on the views expressed.

In Spain if you want to experiment some invention, in most fields you need so much paper work, licenses, engineer visas, etc…, that unless you are a bored millionaire or someone with a nice subvention, doors are closed. If we add that an overwhelming pile of regulations do not let you do anything out of the rules, innovation is almost forbidden and only is feasible through government…

And that is not all. I worked in a company that developed new tech products. We had a great and cheap fleet management hardware and software. The politicians created a subvention so the taxi companies could buy the same product from a competitor whose product was ONE HUNDRED TIMES more expensive, older, bigger…
All to be said, our company worked with a lot of public money, but with such a price difference much of the subventions ended in the political parties.

That is how science works under government, it becomes a black hole of tax money and the results are more politics than science (global warming, bio-diesel, forced vaccinations, …, corruption and attacks over freedom).

“Funding for space exploration started as a result of a western panic when the USSR were able to launch Sputnik, creating fears that they could destroy America from space. Given the fact that the project has had no further applications, the private sector would have aborted or downscaled this project and saved the public billions of dollars.”

If we count space exploration from the days of Sputnik, this is a very unfortunate example, because near earth space activities have given is:

Fantastic navigation devices.

Loads of applications of satellite imagery, including GOOGLE Earth.

Long distance, bulk communications links for telephone and internet.

Some measure of security that has made it possible to forge nuclear arms reduction treaties.

etc.

I am not sure if this invalidates the whole thesis, but it should give pause for thought.

Hi, Clearly you are replying to the substantial literature on innovation. Stiglitz is one of those economists who views knowledge as a public good, non-excludable and non-rivalrous. Specifically he views basic research as too uncertain in applicability to be adequately funded by private enterprise but then that ignores what Bell Labs did for years and what IBM continues to do today in basic science. But in your article you fail to distinguish between basic and applied science. When there is a near term financial gain then the private sector will fund the project but it is uncertain whether basic science will be funded optimally. Your failure to make the distinction weakens your argument. If private funding of basic science is uncertain then a bias against public financing carries a large risk for the future trajectory of growth.

I also find your dismissal of space exploration a bit troubling as a host earth based benefits flowed from the space program. Communication Satellites, Earth sensing systems, GPS to name just a few. Your framing of the space race between the US and the USSR is also incorrect. It was the obvious development of missle technology for the delivery of nuclear weapons that worried the Pentagon at the time. Also, the fact that we did not protest the passing of Sputnik over our territory allowed us to develop and deploy spy satellites ourselves without fear they would be shot down by the Soviets.

But, I’d point out that Bell Labs is a bad example. Bell was a monopoly before Reagan’s reforms. Part of the government deal that allowed that monopoly to continue was an understanding that Bell Labs research would be quite open to others. There were many markets where it wasn’t legal for Bell to enter.

Current, You are absolutely correct about monopoly power and innovation. AT&T supressed many inventions through the years. Magnetic tape in the 1930s, mobile phones, DSL, fiber optics, anything that could be a threat to their monopoly power was supressed or rolled out painfully slowly. That doesn’t diminish the seven Nobels that its scientists won or the other inventions including the transistor that they gave away or UNIX and the list goes on and on. Basic research and innovation within a monopoly structure might also apply to a government monopoly over such research. But there is a certain inevitability to invention because every inventor feels that he is racing against unknown competitors. Scientists feel the same pressure. It’s a race and as such competition for a “prize” fame or fortune or both is a great motivator.

If knowledge emerging is inevitable, as many believe, (the light bulb had many inventors, 7 I believe) then the question is does public finance speed it up or slow it down or have no effect?

The problem with government stepping in to solve a sub-optimal situation necessarily posits with government extrodinary prescience. If we reject that government somehow “knows best” then the whole game of correcting for externalities is fraught with risk. Even such solutions as Pigouvian taxes might skew or redirect progress along another path that is less productive. But we also have unintended progress from government action (the space program) but then the rule of the inevitable rears its head again and we are back to square one and asking ourselves about the role of government.

I agree with Mr bailey that she really dropped the ball about the benefits of space exploration. I don’t think it invalidates the entire work, but it leaves quite a scar on it. Perhaps that paragraph would have been better spent writing about military research, like the attempt to create a real flying UFO, which turned out a hovercraft that was not stable during flight nor could get off the ground more than 1 story. I believe the price tag was somewhere close to 1 trillion, but I’m not sure about that number. All it all it was a good piece, in my opinion.

I must disagree with Perz, Bailey and Hales, on the point of government funded space exploration. The three of you are committing the error of considering only that which is seen but not that which is not seen as described by Frederic Bastiat in The Broken Window fallacy. Sure, there have been some useful inventions that have come about as a result of space exploration but there is no evidence to suggest the private sector would not have invented them anyway. But that is beside the point.

The government space program, like any government program, has been and is enormously wasteful and is, measured by its own goals, a failure. We must consider not just the supposed ‘benefits’ of this program but also that which is not seen. What is not seen are the infinite inventions that would have come about, and wealth that would have been generated if the government had not coerced billions (trillions?) from private individuals to pay for it. The space program is capital consumption on a grand scale and has made us all poorer.

Miss Acavalos is absolutely correct on this point and if you look closely, had somewhat anticipated your objections with her discussion of the Internet.

The latest development comes in the form of an announcement at the weekend by would-be Moon-exploitation firm Astrobotic Technology that it has signed a deal with famous rocket company SpaceX to launch its first lunar mission atop a Falcon 9 rocket.

According to Astrobotic, the mission will lift off in late 2013 if all goes as planned. The Falcon 9 launch stack will shoot Astrobotic’s robot lander and rover package on a four-day flight to the Moon, following which the rover will begin a three-month journey across the lunar surface. If successful, and if no other contender gets there first, the mission would scoop most of Google’s $30m Lunar X-Prize pot for Astrobotic. And that’s not all, apparently.

“The moon has economic and scientific treasures that went undiscovered during the Apollo era, and our robot explorers will spearhead this new lunar frontier,” enthuses David Gump, Astrobotic president.

Leave enough money in private hands, and it will get spent on grand and noble projects.

This is a superb article to the point of being historically significant. It clearly shows why and how science is much better off conducted in the free market and in ‘private.’

Science is one of the most important factors for innovation in the free market, and right now is still dominated by productivity destroying governments. Freeing science from the government boot is one of the most important things that can be done for the welfare of humanity.

And yes, spending billions of dollars to put government employees on the moon several times and in orbit over 100 times was a horrific waste of resources. 25 billion + 140 billion = 165 billion for apollo and the shuttle. How many new businesses, new medical products,college degrees, homes, dr visits and everything else could free individuals have bought or built if they had been allowed to keep their 140 billion? Probably enough to prevent %20 of America from being unemployed right now.

Thank you for the interesting article. I especially like how you come to the conclusion that “This creates an environment in which scientists do not cooperate and become increasingly preoccupied with secrecy instead of the promotion of knowledge as their success necessitates another scientist’s failure.” This is very true.

One weak point in your argument is that it seems to hinge upon a utilitarian conception of science, viz., that science be conducted with the aim of obtaining non-Intellectual Property (IP), marketable results, but that is engineering. Theoretical physics, e.g., is more concerned (or at least should be) about answering questions about the physical world and seeking pure truths than it is concerned about supplying engineers with intellectual tools.

Yes, the government system “is a system that is ‘obsessed with supply, and … ignores[s] actual demand.'” It fails to recognize what the demand for pure truth is. Pure truths are marketable. If they weren’t, private universities wouldn’t function.

I’ve worked in science at a University and at a corporate research lab.

I would agree with Alan that this article describes engineering which is concerned about commercializing existing knowledge. Science whether applied or theoretical is a business that turns money into new knowledge and prestige which benefits the career of the scientist. Taking this new knowledge and applying it can subsequently generate more money. But that process is not science; it is engineering.

This article is mostly ideological — it is an attempt to convince the reader that a pure free market system is preferable in regards to science. Such a system is not ideal.

The question then is what the right amount of science research there should be. One option would be to allow the market, i.e. Universities, corporate research labs, and wealthy benefactors, to set the level of scientific research. Unfortunately the market outcome reflects the preferences of the average person, who is ignorant, obsessed with material goods, drinks Budweiser beer, uses hyperbolic discounting, generally cares about social conventions and the opinions of others rather than pursuit of rationality, etc. So the market outcome, both in private and public funded areas, is often uninteresting because it does not allow the maximum rapidity of advancement of society and technology. It is particularly important we work towards points in the future such as stem cell applications, nanotechnology, the Singularity, etc, precisely because they will solve all of our really boring Economics 1.0 problems with preference functions. (e.g. if you can live a million years your happiness goes up 10,000x, so you should rationally put extremely high resources towards that end).

In other words, using only market mechanisms will set the level of science too low. Actually the public funding of science is currently set too low for the maximum advancement of technology and society. But the public funding directly solves problems such as theoretical science being underfunded in a market setting because it has little practical utility. (Yes, theoretical work has been done at Bell Labs and Microsoft, but in low proportion compared to the public theoretical work).

It should be conceded though that a free market for science would result in a lot more applied work because the same scientific careers would need to be funded entirely by private corporations, and therefore the scientists would need to demonstrate a lot more practical applications of their ideas. Probably to get the best of both worlds government grants should provide optional incentives for commercialization, without requiring commercialization since not all scientists are suited to it and some are in theory which has few direct applications.

Finally, I would like to point out that this article is motivated by putting a strong prior on the world that consists of atomic individuals interacting through voluntary market transactions. This prior gives just what you would expect which is a lot of ignorant, navel-gazing people obsessed with satisfying their personal happiness functions. Occasionally because the huge amounts of capital sometimes get allocated to interesting areas you get technologists or scientists advancing society, but mostly you just get stasis as the market arbitrages around vast quantities of “happiness desired by ignorant people”. The assumption is arbitrary. I much prefer my elitist view which says that free markets are generally good, but privilege and resources should always be allocated in an outsize way to those who advance directly society, knowledge, technology, since the markets alone will advance at a less interesting rate than if there is public funding for these beneficial activities.

“The question then is what the right amount of science research there should be.”

It’s not just the amount of research that matters, but the type of research. In a world of scarce resources, who decides which work gets prioritised?

What do you make of the millions squandered on politicised ‘science’ in the fields of climate research and public health?

It seems very dangerous to allow the political class to decide our scientific priorities. We can attempt to mitigate this by adding levels of indirection – committees of appointed ‘wise men’ to divvy up the pot – but he who pays the piper ultimately calls the tune.

For ‘pure science’ with no immediate practical applications, I’d far rather place my faith in wealthy benefactors. There’d be many more of those if the government didn’t confiscate so much of what we earn.